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Massive DMD Holding ducks state repo bid

A government attempt to claw back its majority share in Slovak engineering giant DMD Holding was stymied at the firm's January 5 extraordinary shareholders' meeting. The meeting elected a new supervisory board and board of directors, but the firm's old guard insisted that in accordance with changes made to the company's statutes on September 10, 1998, the meeting did not have the necessary quorum to make the switch.
On October 29, according to the independent SITA news agency, the FNM state privatisation body transferred from its portfolio a 42% stake in DMD Holding to a new firm, DMD Progress. The move lowered the state's share in DMD Holding, which is a major shareholder in all large engineering firms in Slovakia, from 60.72% to 18.8%, resulting in a de facto privatisation of the firm.

A government attempt to claw back its majority share in Slovak engineering giant DMD Holding was stymied at the firm's January 5 extraordinary shareholders' meeting. The meeting elected a new supervisory board and board of directors, but the firm's old guard insisted that in accordance with changes made to the company's statutes on September 10, 1998, the meeting did not have the necessary quorum to make the switch.

On October 29, according to the independent SITA news agency, the FNM state privatisation body transferred from its portfolio a 42% stake in DMD Holding to a new firm, DMD Progress. The move lowered the state's share in DMD Holding, which is a major shareholder in all large engineering firms in Slovakia, from 60.72% to 18.8%, resulting in a de facto privatisation of the firm.

The transfer occured one day before the former government of Prime Minister Vladimír Mečiar resigned, and was ostensibly associated with a financial claim held by DMD Holding on the FNM in the amount of 1.6 billion Sk ($44 million). Štefan Gavorník, then president of the FNM, sat at the same time on the supervisory board of DMD Holding.

The new cabinet claimed that the value of the transferred shares far exceeded the claim owed to DMD, and set out to recall DMD Holding's management preparatory to launching a court challenge of the share transfer.

The January 5 extraordinary shareholder meeting at DMD Holding, according to the Národna Obroda daily paper, was attended by shareholders owning almost 60% of the DMD Holding's shares, including the Economy Ministry (23.94%), the FNM (18.72%), the Slovak Gas Industry (SPP, 8.09%), Slovak Electricity Works (SE, 3.58%), the Slovak Savings Bank (SLSP, 2.46%) and the General Credit Bank (VÚB, 1.01%).

But the shareholders represented were unable to budge the old guard. Ernest Valko, a well-known lawyer who is representing the FNM in its suit against DMD Holding, said that at DMD Holding's September 10 meeting, a new class of preferred shares had been issued in the amount of 5 million Sk and had been purchased by a newly created company, DMD FIN. Valko said that the meeting then changed DMD Holding's statutes in such a way that changes to DMD Holding's management could only be made at shareholder meetings attended by 30% of equity shareholders and 30% of preferred shareholders. "They made up these two kinds of shares and in that way blocked any efforts to change the management," he said.

Neither DMD Progress nor DMD FIN attended the January 5 EGM, meaning that the meeting's recall of the old management and election of the new boards was invalid, since the meeting didn't have the necessary quorum to vote. "Present at the meeting were shareholders owning only 55% of the equity shares and 0% of the preferred shares," said Juraj Draxler, assistant to the president at DMD Holding, adding that this was why "nothing [concerning DMD Holding management] has changed at all."

Valko said that it was absurd that DMD FIN, which holds only 0.09% of DMD Holding's total shares, could defy the wishes of the majority of shareholders. "It's funny that their 5 million Sk [500 shares of 10,000 Sk each] can block almost 5 billion Sk, the approximate extent of DMD Holding's basic capital," Valko said.

"What is also strange is the fact that all three companies - DMD Holding, DMD Progress, and DMD FIN - are located in the same building in [the western Slovak town of] Trenčín," continued Valko. "And what's more, the same people represent all three companies."

In the wake of the failed January 5 meeting, Valko continued, the FNM and the Economy Ministry would take legal action to fight the September changes to DMD Holding's statutes, as well as the 42% share transfer. "It wasn't clean," he said. "The court will decide."

But Draxler disputed Valko's claim that the October share transfer had been improper. "The FNM simply owed money to DMD, and because they didn't have the money, they paid with the shares." He also did not see anything unusual in the position of the FNM's Gavorník on the DMD supervisory board. "There's nothing strange in that. He was there as a representative of the FNM."

In the final analysis, Draxler said, the change of boards at the January 5 shareholder meeting was invalid because it had not yet been registered at court. "And according to my information, the courts won't legalise it any time soon." Draxler concluded.

But Valko insisted that the decision of the shareholders' meeting carried greater weight. "That's the constitutive act. Registration is only a declarative one," he said. Despite the lawyer's certainty, however, the old management continues to hold power at DMD Holding.

The government's attempts to regain its stake in DMD Holding - and to investigate other sales of state property - are being given mixed reviews by foreign investors. Ehsun Khan, vice president of the Fixed Income Division at Morgan Stanley investment bank in London, admitted to having some doubts about 're-privatisation.'

"It can get quite complicated, so it has to be taken care of quite delicately," he said. "The government should decide how far they want to go. If it's something they can handle, they should probably go for it. But if it's going to get very messy and a lot of innocent investors are going to be hurt, then it's probably not going to be very good."

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